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Sterling retreats after weakness in UK flash PMIs for May

  • The British Pound faces selling pressure near 1.2750 following weak preliminary UK PMI data for May.
  • The slower-than-expected decline in inflation in the United Kingdom weakens the BoE's rate cut forecast for June.
  • The US dollar remains firm as the Fed insists on waiting and watching interest rates.

The British Pound (GBP) falls sharply from the crucial resistance of 1.2750 in the Thursday session in London following the release of weak preliminary UK PMI data for May. The S&P Global/CIPS PMI report shows that the composite PMI fell at a faster pace to a two-month low at 52.8 from estimates of 54.0 and the previous reading of 54.1. The sharp decline in the composite PMI was driven by weakness in the services PMI, which fell to its lowest level in six months, settling at 52.9, compared to the consensus of 54.7 and the previous reading of 55.0. The manufacturing PMI surpassed the 50.0 threshold that separates expansion from contraction and grew strongly to 51.3. Economists had expected the manufacturing PMI to have risen to 49.5 from 49.1 in April.

GBP/USD fails to sustain gains even as traders trim bets on the Bank of England (BoE) shifting to monetary policy normalization at its June meeting, after having maintained its hawkish stance for more than two years on interest rates. Expectations for the BoE to begin cutting interest rates from its June meeting have eased as April's Consumer Price Index (CPI) report showed inflation softening at a slower pace. than expected.

According to the CPI, headline and core inflation fell to 2.3% and 3.9%, respectively. The measure of inflation that dashed hopes of BoE rate cuts in June is the services price index, which fell modestly to 5.9% from the previous reading of 6.0%. Stubborn British services inflation remains a major obstacle to advancing disinflation, driven by wage growth.

Daily Market Moves Summary: Pound Softens on Weak UK PMI Data

  • The British Pound falls against the US Dollar as weak UK PMI data offsets the impact of BoE rate cut hopes. The BoE is expected to start cutting interest rates later due to a slower-than-expected decline in British inflation in April. Before the June meeting, the BoE will have more data on employment and inflation, which could strengthen the case for a rate cut if it is in line with the central bank's forecasts.
  • The British pound is also expected to remain on the move on Friday as the UK's Office for National Statistics (ONS) releases retail sales data for April. Retail sales data represents household spending, providing significant clues about the inflation outlook. On a month-on-month basis, retail sales are estimated to have declined 0.4%, after remaining stagnant last month. In annual terms, retail sales would have contracted 0.2%, compared to a growth of 0.8% in March.
  • On the other side of the Atlantic, the US dollar maintains gains induced by fear that US inflation's progress towards the 2% target has stalled. Minutes from the May meeting of the Federal Open Market Committee (FOMC), released on Wednesday, suggest that the confidence needed to consider rate cuts has been undermined by the disappointment of the latest inflation data.
  • Looking ahead, investors will focus on preliminary S&P Global PMI data for May and initial jobless claims for the week ending May 17. Over the past two weeks, the number of people filing for unemployment benefits has remained higher than expected, indicating that the strength of the labor market is weakening.

Technical Analysis: Sterling Fails to Extend Winning Streak

The British Pound fails to extend its winning streak for a fifth session on Thursday due to weak UK services PMI data for May. However, the GBP/USD remains comfortably stabilized above the 61.8% Fibonacci retracement (traced from the March 8 high at 1.2900 to the April 22 low at 1.2300) at 1.2667.

The Pound is expected to remain on an upward trajectory as all short-term and long-term EMAs are tilted upward, suggesting a strong bullish trend.

The 14-period RSI has moved into the bullish range of 60.00-80.00, suggesting that momentum has tilted to the upside.

economic indicator

S&P Global/CIPS Composite PMI

The Composite Purchasing Managers' Index (PMI), published monthly by the Chartered Institute of Procurement & Supply and S&P Global, it is a leading indicator of private business activity in the United Kingdom, in both the manufacturing and services sectors. The data comes from surveys carried out with senior executives. Each response is weighted based on the size of the company and its contribution to the total manufacturing or services production corresponding to the subsector to which said company belongs. Survey responses reflect the change, if any, in the current month compared to the previous month and may anticipate trend changes in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. The index varies between 0 and 100, with levels of 50.0 indicating that there have been no changes compared to the previous month. A reading above 50 indicates that the UK private economy is generally expanding, a bullish sign for the British Pound (GBP). Meanwhile, a reading below 50 indicates that activity is declining overall, which is considered bearish for GBP.

Source: Fx Street

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